There are as many different types of business person as there are people, but legally there are only a limited number of types of company – and choosing the right one for you is a key decision in your early days.
You should think carefully about the type of company structure you choose because it has implications for the kinds and amount of tax you will pay as well as your financial liability. This means that you should always seek advice if possible – Business Link has produced a handy interactive tool to help you decide which legal structure is right for your business. Find out more here.
The main different types of business are:
Sole trader
Being a sole trader is probably the easiest way to be a business, as it involves paying no registration fees, keeping the accounts is straightforward, and you get to keep all the profits. However, you’re also personally liable for any debts that your business builds up - this means your home or other assets may be at risk if your business runs into trouble - so if you are running a company with significant risk this can be a poor option.
Partnership
A partnership shares many of the characteristics with sole trading, but (as you might guess), involves more than one person. Accounting is straightforward, and the only major document required is a partnership agreement – a legal paper which sets out the terms of the partnership, how profits will be shared, and so on. However, as with sole traders, partners are personally jointly liable for the debts of their business.
Limited liability partnership (LLP)
A second type of partnership is the limited liability partnership. This is a similar structure to ordinary partnerships, but the partners’ liability for the company’s debts is limited to their original investment and any personal guarantees they’ve made. However, there is more paperwork involved in setting up a limited liability partnership – they must be registered at Companies House – plus the company must file accounts as well as annual self-assessment returns.
Limited liability company
Limited liability companies are distinct legal entities, which have finances totally separate from their owners, so any debts are its own rather than yours. They are owned by their shareholders – which may be other companies – and must be registered at Companies House. Profits are usually distributed to the shareholders, in the form of dividends, and filing accounts is more complex than either sole traders or partnerships.
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